Analyzing the Challenges of Intermodal Traffic

The weekly rail freight traffic reports sent out by the Association of American Railroads have been painting a picture of declining traffic, including intermodal traffic.

But a look behind those numbers shows that the decline is not necessarily what it might seem to be.

Speaking at a conference last week in California, industry insiders said a number of factors have contributed to declining number for intermodal traffic, including the trade war between the United States and China, increased truck capacity, and the use of the precision scheduled railroading operating model by most Class I railroads.

It also hasn’t helped that the AAR figures compare traffic in a given month against the same month in the previous year.

For intermodal, that might not be a fair comparison because intermodal traffic was unusually high in 2018 as merchants sought to have goods shipper early to avoid planned tariffs and the trucking industry was roiled by historically tight capacity constraints.

In 2019, trucking companies have increased their capacity and taken back some of the business that last year moved on rails.

Intermodal analyst Larry Gross told the conference that through August international intermodal traffic is up 0.3 percent while domestic intermodal is down 6.3 percent.

But Gross said if you compare 2019 to 2017 when intermodal traffic was more normal, international volume is up 6.8 percent and domestic intermodal volume is up 1.1 percent.

Citing the anomalies of last year, Lars Jensen, CEO of SeaIntelligence Consulting, said expects international intermodal traffic to show a year-over-year decline when comparing 2019 and 2018 because traffic will start slowing this fall as the surge to beat the tariff deadlines plays out.

Jensen said this should not be interpreted as a decline in demand.
Panelists speaking at the conference did say that railroads face substantial challenges in competing for domestic intermodal traffic as some of that business moves to the highways.

“Intermodal is having a competitiveness problem,” Gross said.

Gross, who has been tracking what the diversion of intermodal from to highways since 2000, said the diversion of business from rail to highway is now in its fourth consecutive quarter, the  the longest losing streak since he began tracking market share.

He doesn’t believe the diversion of intermodal from rail to highways is related to service issues because the average intermodal train speed today is higher than the five-year average.

The diversion has occurred, Gross said, because of railroad price increases and interline service reductions imposed after railroads adopted the PSR operating model.

Railroads practicing PSR are focusing instead on point-to-point service with less complexity and work en route.

As an example of that, Gross pointed to the ending of interchanging of intermodal cars in Chicago in favor of higher-density intermodal lanes.

He said the cost and complexity of cross-town rubber-tire moves between intermodal terminals in Chicago has pushed volume to the highway for its entire journey.

This runs is in opposition to the industry trend of shipments that move to more dispersed locations.

Gross said that during the first half of 2018, the intermodal revenue per unit of Class 1 railroads grew at a pace that would equal a 9 percent annual rate increase at a time when the trucking industry has excess capacity and truck rates are declining.

“Intermodal, in its simplification mode right now, is swimming against the tide,” Gross said.

Stifel analyst David Ross said at the conference that rail intermodal does not fit well into fast-growing ecommerce supply chains that emphasize delivery speed.

“If speed is of the essence, supply chains will favor truck over intermodal, and pay that 10 percent to 15 percent premium, just to get the service,” Ross said.
Not surprisingly, railroad industry executives argue that they are working to increase the speed by which intermodal traffic moves and that will net new business.

Maryclare Kenney, vice president of intermodal and automotive at CSX Transportation, said that carrier’s PSR-related changed have dramatically improved service, which she said will result in volume gains.

Tom Williams, group vice president of consumer products at BNSF, also said that intermodal is the best way to maintain a flow of goods to electronic retailers’ distribution centers and represents a growth opportunity for railroads.

Williams said intermodal pricing typically lags movements in truck pricing because what moves on the railroad is handled under contracts.

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